Market Rally Revives Japan's Battered Firms

By

Brad Frischkorn

Jan. 11, 2013 6:25 a.m. ET

The weaker yen and the stock market rally it has ignited are breathing new life into some of Japan' most battered companies.

Struggling SharpSHCAY0.00% Corp, which has been fervently trying to raise funds as of late, saw its shares rise 13% on Friday, while Tokyo Electric Power Co.95016.21%, owner of the crippled Fukushima Daiichi nuclear power plant at the center of Japan's 2011 nuclear accident, added 5.7%.

Friday's rally, driven in part by a new government stimulus plan, put the Nikkei at a fresh 22-month high, up 25% since Nov. 14, when reports over snap elections that might allow a change of political leadership caused a buzz among investors over a change to a more business-friendly political leadership.

The yen has since fallen to a 2½-year low against the dollar, driving up shares of exporters, some of which have hit multiyear highs in hopes the weaker yen will boost their overseas sales.

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In the broader market, the Nikkei rose 1.4% Friday to 10,801.57, its first consecutive nine-week bull run since late 1988 and highest closing mark since Feb. 21, 2011. For the week, the Nikkei added 1.1% and is now up 3.9% from the start of the New Year.

It is not unusual for weak companies to rise strongly during a market rally as investors get more willing to make risky bets. And while the gains on these volatile stocks can be easily wiped out, they can also help restore confidence in the companies themselves, boosting their sales and ability to raise money.

Embattled Sharp has risen 117% since Nov. 14, while the shattered Tokyo Electric, now de facto nationalized, has gained 80%. While the firms' respective troubles differ wildly, their fall in credit and investor standing are similar in that serious long-term investors had been hitherto reluctant to touch them.

"A higher tide has the effect of lifting all boats as the potential for improved earnings is factored in," says Ed Rogers, CEO/CIO of Tokyo-based Rogers Investment Advisors. "Shares that had been underserved before the recent rally are starting to get the kind of attention they would command on overseas [exchanges]."

Sector-wise, financial shares as well as auto makers have ranked among the best performers over the course of the present rally, adding 61% and 37%. Nomura HoldingsNMR-0.14% has been a particular standout, surging 73%, while retail lender AifulAIFLY9.52% Corp has soared 161%.

Hopes for the plan, as well as a sharp fall in the yen because of worse-than-expected November current account deficit figures before the Friday opening bell, helped push up the market.

"Mr. Abe's promises for fiscal reform and more central bank easing have shown signs of concrete action, which has allayed some concerns that his talk thus far has been just bluster," said SMBC Nikko Securities general manager of equities Hiroichi Nishi, noting news that the government is considering steps such as raising the maximum income-tax rate for the wealthy.

"Weakening the yen, trying to raise inflation, reviving the economic export engine, are very much part of the LDP playbook, and I think it is a bit of an open question how much this will benefit the Japanese economy," said Petr Kocourek, senior portfolio manager at First State Investments in Singapore, which has more than US$159 billion worth of assets under management.

First State added equity exposure to Japan after the LDP's December election victory.

Japan's stock rally comes amid a more risk-on investor stance to global equities. The Hang Seng Index is up almost 10% since mid-November, while the S&P 500 has added over 7% over the span, to a five-year high.

Nevertheless, given the still heavily underexposed nature of foreign buyers to the Japan market, some players see much more potential upside to Japanese stocks.

"Judging by options activity, many investors remain bullish for the midterm," said an equity trading director at a foreign brokerage, counting heavy bidding at 11,000 and 11,500 strike levels for February Nikkei options, far more than interest in Nikkei 10,000-level puts.

Ed Rogers sees the dollar eventually settling in a range of ¥95-¥105 for the next few years, which would translate into a significant windfall for exporters' profits. "The end-March fiscal year should be one of the most pivotal earnings reporting periods in years," he said.

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